Revenue-based financing, also known as revenue-based investing or revenue-share financing, is a way emerging or high-growth businesses can raise capital. With this method, investors are putting growth capital into the business in exchange for a certain percentage of monthly revenues.
As the founder of a company, you have probably done your research and know all the details of traditional financing options available to you. Whether it is traditional bank loans, bootstrapping, friends and family or venture capital, you know exactly what you are getting yourself into. However, do fixed monthly payments scare you? Do you not want to give up equity in your company? That is where revenue-based financing may come into play for you.
How does revenue-based financing work?
For revenue-based financing, it is a pretty simple concept. The amount you pay per month increases or decreases to match the natural ups and downs your business may go through. This allows you, as the owner, to never be strapped down to fixed interest payments you may not be able to afford.
As the owner, you are also retaining full control of your company. You are also minimizing equity dilution. Revenue-based financing is giving you the access you need to growth capital, but without having to give up 20 or 30% of your company.
How the investment works
Once the terms of the deal have been determined and the paperwork is signed, you will receive the funding. From there, the capital is yours and you can use it however you wish. With this type of funding, lenders like revtap are putting trust in knowing that you will make the right decisions to lead your business to growth.
During the negotiations, a predetermined percentage of your monthly revenue was determined and that amount would be paid to the lender. When paying back the loan, you will be making payments based on a weekly or monthly percentage of revenues. This allows the flexibility you may be searching for. If revenues are lower one month, then your monthly payment would be lower too. These payments are made until the loan is paid in full.
Benefits of revenue-based financing
As an owner of the company, one of the biggest benefits of revenue-based financing is how you are not handing over a portion of equity and control of your business to an investor. There is limited equity dilution with revenue-based financing and it allows you to maintain control and lead your business with your vision intact, which will lead to continued growth for the company.
With revenue-based financing, you are also not having to put up any personal guarantees, like your home or new vehicle. The startup nature can be volatile, so one month the revenues are through the roof and then the next month they may be way down. Revenue-based financing allows you to base that monthly payment on how much revenue the company is bringing in that month, so no need to worry about making enough money to pay that fixed interest rate payment from the bank.
In the end, going with revenue-based financing will be less expensive than using equity. Equity means a percentage of ownership in the company. If your business grows under revenue-based financing, you will catch more of the upside than with venture capital.
Cons of revenue-based financing
While there are many benefits of revenue-based financing, there may be some downsides for certain owners. Newer or smaller startups may have a hard time finding lenders, as many lenders have certain requirements, such as consistent monthly revenue of a certain amount.
While you are not giving up equity in your company, revenue-based financing does require you to actively repay the lender. Yes, these payment options can be flexible and work with your incoming revenue, but they still do need to be paid. This can cause money-strapped startups some issues when they want to take that money and invest in more growth options.
Revenue-based financing lenders
There are companies out there that specialize in this type of financing option, like revtap. We want to provide non-dilutive capital to companies while also giving investors a chance to share in the growth of some exciting companies.
By going with revtap, you can repay all or portions of the principal anytime. We will take a small share of your monthly revenues until the funding is repaid. This is all being done without large monthly payments, no usage restrictions or collateral requirements. It’s key to remember that revenue-based financing is not startup financing, it is growth financing.
Interested in revenue-based financing? Schedule a call today to talk with a representative from revtap about your financing options!